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FCA urged to clarify interest-only mortgage advice rules

The Financial Conduct Authority has been urged to provide clear rules for advising on retirement interest-only mortgages amid fears advisers could face accusations of mis-selling.

The FCA is consulting on the removal of a regulatory barrier to allow interest-only mortgages for older consumers that will only be repaid on a specified life event, such as the customer’s death or move into residential care.

It stated its previous decision to define such loans as ‘lifetime mortgages’ may have restricted consumer access to the products because firms may have been reluctant to alter standard lending procedures.

But while the move has been broadly welcomed by the industry – with many believing it will bring down the cost of borrowing for older consumers – concerns have been raised about the potential for a mis-selling scandal.

Matthew Fleming-Duffy, director at Bournemouth-based Cherry Finance, said: “I think there should be some rules around this and the FCA should fully engage with the market before they set these rules.

“If the FCA does not create clear guidance, lenders create products and advisers advise and hope they don’t get it wrong as things change in the future.

“It needs to be carefully introduced in the market. I am always cautious with these things, and we have seen the industry turn on advisers. The fault needs to be shared if things go wrong.”

Mr Fleming-Duffy said clear rules had not been provided prior to the financial crisis, when the availability of interest-only mortgages was widespread.

He claimed that when people failed to put an adequate repayment plan in place, it led to accusations that advisers had mis-sold the products.

He said the FCA “don’t want to get prescriptive around these transactions” and “don’t want to get involved in criteria and underwriting” – but that this time a different approach was needed from the regulator.

Adrian Kidd, IFA at London-based Radcliffe and Newlands, gave his full support to the provision of rules rather than guidance when it came to the introduction of interest-only mortgages in retirement.

He also expressed concerns that the products could be sold without the consumer receiving advice.

He said: “If it is a normal interest-only mortgage that runs into retirement, where is the need for advice?

“You don’t want to set something up like that without really knowing what they are doing.

“If you are dealing with a call centre and doing that remotely, then alarm bells go off. Who is the person at the end of the phone and how long have they been in the industry?”

His concerns were echoed by Daniel Bailey, principal at Derbyshire-based Middleton Finance, who said: “I think it is imperative that advice is made compulsory for retirement interest-only mortgages.

"The consumer needs to understand the implications of taking out such a mortgage.”

The FCA’s consultation paper proposes “a small number of additional requirements for any retirement interest-only sale”, including the disclosure of any restriction on other people living in the property and the disclosure that a lifetime mortgage may be available and more appropriate for the customer.